If we were on the gold standard banks would be required by law to keep a certain fraction of gold in reserves. This would drive down the circulation of dollars in the economy and cause huge deflationary pressures because of the limited supply of gold. The only advantage of the gold standard in modern times is that it ensures that you wont have major inflation problems, certainly not the kind of extreme runaway inflation that happened in 1930s Germany or in Eastern Europe, or as is currently happening in South America. But its not practical in a large modern economy that requires a large enough money supply. Even before modern times, the gold standard presented problems when the supply of gold became scarce. The big disadvantage of it is that it makes the money supply very inflexible because it is tied to the supply of gold in the world. It can take years for a new wave of gold to be discovered and therefore raise the money supply.
